It says you can only put plain text files in the notes folder, and yet it does not display the note in plain text (I believe the display's font is Helvetica).
Plain text means it does not have any special coding/characters in it such as Bold or Underscores or page breaks.
Plain text docs do not store anything except text. It does not specify a font. That is taken care of by whatever app you are using.
I suppose I would have to convert the file from .rtf to .txt before putting it into my notes folder...or can you put rtf. files in there after all?
You can put rtf in the Notes folder but the iPod will ignore any of the formatting.
You can use some html to format a bit as well as linking to other files/songs/photos.
Go here -> Guided by iPod and click on *iPod Notes Feature Guide* at teh bottom for a doc explaining the notes.
There are a few apps and web pages to put text docs into the correct size files.
Here's one -> http://www.ipod-notes.com/ (I haven't used it so no idea if it's any good or not).